Consideration is one of the most important aspects of commercial contracts, especially for freelance professionals and small business owners. In a legal context, consideration is not about being thoughtful. It’s about an exchange of value between you and the other side.
In most cases, a contract is an agreement between two or more parties who trade something of value. A lot of things can be thought of as valuable in these situations: money, goods, services and even promises can be used as consideration under certain circumstances. As an independent artist, freelancer or small business owner, there are four types of consideration you should look for in your contracts. If you don’t find any of them in a particular deal, then the deal might not have any value to you.
The Four Types of Consideration
· Delivery Based Consideration: You get something specific once you deliver the agreed upon material. For example, if you design a website for $300 per hour and you spend 22 hours on the project, then you get $6,600 upon delivery of the site. This type of consideration could be defined as a flat fee, based on some measure of performance. This type of payment is typical of work for hire agreements where you are hired to perform a specific task for a limited amount of time (See Contracts 101: Creator Owned vs. Work for Hire)
· Performance Based Consideration: You get something specific once the project begins to generate some sort of profit. For example, if you are entitled to 20% of the gross revenue of a book, then you make money if and when revenue comes in from the sale of the book. This is a common form of consideration for collaboration agreements, self-publishing platforms like Kobo, KDP and creator owned agreements with certain publishers.
· Combined Consideration: You get paid coming and going. In an extreme example, Robert Downey Jr. allegedly pulls in up to fifty million dollars in direct salary, box office bonuses and back end participation for playing Iron Man in the Marvel cinematic universe (See RDJ Pay Set to Hit Fifty Million). While you might never make as much as RDJ, these can be the most lucrative types of deals because they give the artists both protection against a poor performing project and the benefits of a successful project.
· Production Consideration: You get someone else to pay for the cost of your project. For example, if you have a story you want to publish, but can’t cover the production and distribution costs of the release, someone else can pay those upfront costs to get your work out into the world. Sometimes this comes from single sources, like a production company or publishing house. Crowdfunding is another variation on production consideration. This can be the least lucrative kind of consideration. With a single source, the creator can lose all the rights to their characters and stories for a few thousand dollars that they never receive directly. With crowdfunding, all the revenue might go into the project or you may fail to reach your funding goals altogether. While many of these deals can provide exposure and ego gratification, many people regret signing these deals, especially if the project becomes successful and they have no ability to share in the financial windfall.
One of the first things you need to ask yourself when looking at a contract is ‘what am I giving up and what am I getting for it? Giving up your time and effort for cash is a way to make a living. Giving up your inspiration and creativity for the chance at future success is also a decent idea. Giving up everything for nothing is no way to manage your career. Always try to get some consideration in your contracts, even if the other side isn’t being considerate.
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